Hospitals Fear They’ll Bear Brunt of Medicare Cuts

Dona Hanson, a patient care technician at Montefiore Medical, collecting blood from a patient in the emergency room.Credit
Ángel Franco/The New York Times

WASHINGTON — As President Obama and Congress try to thrash out a budget deal, the question is not whether they will squeeze money out of Medicare, but how much and who will bear the brunt of the cuts.

Republicans say that some of the savings should come from beneficiaries, and they are pushing proposals like raising the eligibility age or increasing premiums for people with high incomes, who already pay more than the standard premium. Even President Obama has proposed higher premiums, increasing the likelihood that the idea could be adopted. But any significant tinkering with the benefits for older Americans comes with significant political risks, and most Democrats in Congress strenuously oppose raising the age when Medicare coverage begins.

With growing pressure to reach an agreement on deficit reduction by the end of the year, some consensus is building around the idea that the largest Medicare savings should come from hospitals and other institutional providers of care.

“Hospitals will be in the cross hairs for more cuts,” said Lisa Goldstein, an analyst with Moody’s Investors Service, which follows nonprofit hospitals that issue bonds. While hospital executives fiercely defend the payments their own institutions receive, many acknowledge that Medicare is spending too much and growing too fast.

Those executives point out, however, that they have already agreed to $155 billion in cuts over a decade as part of the Affordable Care Act and they face billions more in additional cuts as part of the current negotiations. They argue that such large cuts to hospitals will ultimately affect beneficiaries.

“There is no such thing as a cut to a provider that isn’t a cut to a beneficiary,” said Dr. Steven M. Safyer, the chief executive of Montefiore Medical Center, a large nonprofit hospital system in the Bronx.

Mr. Obama and Speaker John A. Boehner continued trying on Tuesday to reach an overall budget agreement, which would call for significant savings in Medicare and would avert a deep cut in Medicare payments to doctors, scheduled to occur next month.

Mr. Boehner said that an increase in the eligibility age for Medicare, favored by many Republicans, could wait until next year.

“I don’t believe it’s an issue that has to be dealt with between now and the end of the year,” Mr. Boehner said Tuesday when asked about a possible change in the eligibility age. “It is an issue, I think, if Congress were to do entitlement reform next year and tax reform, as we envision, if there is an agreement, that issue will certainly be open to debate in that context.”

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De Marcus Brooks, a nurse at Montefiore Medical Center in the Bronx, covers a patient.Credit
Ángel Franco/The New York Times

The starting point for the current negotiations is President Obama’s most recent budget request, which proposed legislation that would save $300 billion, or 4 percent of projected Medicare spending, over 10 years.

By contrast, Republicans in Congress are seeking savings of $400 billion to $600 billion, at least some of which should come from beneficiaries, they say.

Members of the Medicare Payment Advisory Commission, an influential panel that advises Congress, see many opportunities to rein in costs, and they say that financial pressure on providers could make them more efficient without harming the quality of care. At a meeting of the panel earlier this month, one commission member, Scott Armstrong, president of Group Health Cooperative, a nonprofit health system in Seattle, said Medicare spent “too much” on inpatient hospital care — $117 billion last year. “In an efficient system,” he said, “we wouldn’t be spending that kind of money on hospital services.”

Although Congress may leave the details of Medicare savings to be worked out next year, there is already discussion of cutting special payments to teaching hospitals and small rural hospitals. Lawmakers are also considering reducing payments to hospitals for certain outpatient services that can be performed at lower cost in doctors’ offices. Medicare pays substantially higher rates for the same services when they are provided in a hospital outpatient department rather than a doctor’s office. The differential added $1.5 billion to Medicare costs last year, and as hospitals buy physician practices around the country, the costs are likely to grow, the Medicare commission says.

The savings contemplated by Mr. Obama and Mr. Boehner are substantially larger than the Medicare savings that would be produced by automatic across-the-board cutbacks scheduled to start next month if Congress does not intervene. Those Medicare savings have been estimated at $123 billion from 2013 to 2021. Some hospital executives favor the automatic cuts as more equitable — and less painful — than some of the specific reductions being contemplated.

Hospital administrators and others warn of potential hospital closings, shutting down of unprofitable services like hospitalization for psychiatric care and less access to medical care for the most vulnerable if the cuts are too deep. Nancy M. Schlichting, the chief executive of the Henry Ford Health System in Detroit, says severe cuts might make it harder for hospitals like hers to treat patients without insurance. “It’s a big question whether we can continue to do that,” she said. “We would have to make tough decisions.”

Many rural hospitals are worried about a reduction in certain special payments they received because they treat relatively few people and depend heavily on Medicare as a source of revenue. The payments were put in place after Medicare changed the way it paid hospitals in the 1980s and hundreds of rural hospitals disappeared, said Alan Morgan, the chief executive of the National Rural Health Association in Washington.

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“We have really struggled in the last couple of years to improve our financial condition,” said Jodi Schmidt, the chief executive of Labette Health, a small hospital in Parsons, Kan. The hospital was able to provide trauma services to people in nearby Joplin, Mo., after a tornado devastated the hospital there. “With more cuts, the reality is we’re going to have to really cut services,” she said.

Urban teaching hospitals, which are already receiving some reduced payments for treating poor people under the federal health care law, say they, too, will have difficulty managing if there are significant cuts to medical education programs to train physicians and to the higher payments they get for outpatient care. Some of the hospitals say they have created integrated systems of doctors and hospitals, already delivering care at lower costs, that will suffer.

And any significant reduction in payments is likely to increase the pace of mergers among hospitals as they combine to become more efficient — and try to negotiate better rates with insurers, industry analysts say.

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Dr. Steven Safyer, chief of Montefiore Medical, would not speculate on what might happen if its Medicare funds were cut further. “This is not crying wolf,” he said.Credit
Ángel Franco/The New York Times

Other providers that could see cutbacks include home health agencies. Glenn M. Hackbarth, the chairman of the Medicare payment commission, said they provided invaluable services but were receiving “high levels of payment, way above costs” in many cases.

Complicating the negotiations is also a fundamental disagreement over where the savings should go. Republicans want to use Medicare savings to reduce federal budget deficits. By contrast, many Democrats and health policy experts would prefer to use the money to pay doctors.

Under current law, doctors face a 26.5 percent cut in their Medicare fees on Jan. 1. Just to block that cut and freeze payments to doctors would cost $11 billion next year and more than $240 billion over 10 years, the Congressional Budget Office estimates.

Lawmakers are considering other alternatives, including raising the Medicare eligibility age, a top Republican priority. Republicans say an increase in the Medicare eligibility age is justified because life expectancy has increased significantly since the program was created in 1965. Congressional Democrats say the change would shift costs to older Americans and increase the number of uninsured.

Mr. Obama considered such a proposal in budget negotiations last year and again in the last month. On Thursday, the No. 2 Senate Democrat, Richard J. Durbin of Illinois, said he understood that the idea of increasing the Medicare eligibility age was “no longer one of the items being considered by the White House.”

The Congressional Budget Office analyzed a proposal to increase the eligibility age by two months a year until it reached 67, up from the current 65. Under this proposal, the budget office said, the federal government could save $113 billion over 10 years.

Besides hospital cuts, negotiators are considering a proposal that would require drug manufacturers to provide deeper discounts on prescription drugs dispensed to low-income Medicare beneficiaries. Mr. Obama and many Democrats say this could save more than $150 billion over 10 years. But many Republicans and drug companies oppose it as a form of price controls.

Another proposal being debated would impose a surcharge on Medicare premiums for older Americans who buy the most generous private insurance to cover their deductibles, co-payments and other out-of-pocket costs. The White House and some economists say such Medigap insurance encourages the overuse of medical care. But many beneficiaries are willing to pay for the extra protection.

A White House proposal to impose the surcharge on new beneficiaries would save $2.5 billion over 10 years. The Congressional Budget Office says that another option, setting more stringent limits on Medigap policies, could save more than $50 billion.

But hospitals say they are worried that, in the end, Congress will turn to them for a large share of the savings. Montefiore’s chief executive, Dr. Safyer, said hospitals like his had already made significant changes, focusing much more on keeping patients healthy and out of the hospital. “We’ve become much more efficient,” he said. “We’ve had price compression. We’re innovating and changing.” Those changes take time, he said, but he said he was convinced that they would result in lower spending in the long run.

Dr. Safyer refused to speculate on what Montefiore might do if it faced additional cuts, which could easily total 6 percent of Montefiore’s revenue. “This is not crying wolf,” he said. He added, “I don’t have a Plan B.”

A version of this article appears in print on December 19, 2012, on Page B1 of the New York edition with the headline: Search for More Savings in Medicare Now Tackles How Much, and Where. Order Reprints|Today's Paper|Subscribe